The Reserve Bank of Australia (RBA) has stated that longer-term inflation expectations have remained stable during the post-COVID-19 period of above-target inflation.
According to the RBA, short-term inflation expectations from groups such as households and trade unions did not rise as much as predicted by the bank’s internal models and are now aligning more closely with long-term expectations.
RBA assistant governor (economic) Sarah Hunter addressed concerns over inflation expectations becoming "de-anchored" at the Citi Australia and New Zealand Investment Conference.
She appeared to signal that such risks have been mitigated, which aligns with recent RBA commentary on inflation expectations and could suggest the bank is preparing to shift its narrative towards potential interest rate cuts.
“Short-term expectations appear to be converging towards long-term expectations and these have remained anchored through the recent past,” Hunter said.
“There’s no evidence of expectations being more persistent than normal.
“There’s even some evidence of households and unions extrapolating less from recent inflation, at least during the period of higher inflation.”
Understanding of future trends
Hunter advised policymakers to remain aware of specific price categories that may be especially noticeable to households.
However, she noted that shifts in these price areas "move in both directions and have recently contributed to lowering expectations more rapidly".
Maintaining a low and stable inflation rate was "crucial for preserving macroeconomic stability", she said, while emphasising that a clearer understanding of future price trends enabled businesses to plan for investment and growth.
“It also makes things like budgeting and financial planning easier for households,” Hunter said.
“This is particularly true for those on low incomes, who typically have smaller financial buffers than others and spend more of their income on essentials.
“And with more stable household and business balance sheets, the financial system is more stable.”
According to Hunter, “expectations influencing actual inflation outcomes means unanchored expectations usually result in greater inflation volatility.
“Volatility creates uncertainty, and uncertainty complicates decision-making for everyone.”
The RBA short-term inflation models “missed the turning point” downward, as unions and households have been “extrapolating less from recent high inflation trends.”